Biotech Is One Sector With Strong Vital Signs

Surveying the biotech landscape at the close of 2004, Genzyme Corp. Chief Executive Henri A. Termeer called recent events in the drug and biotechnology industries "disquieting." That's an understatement. On top of the infamous Vioxx debacle, AstraZeneca's problems with Iressa, and other flare-ups over drug safety and efficacy, Chiron Corp. (CHIR ) suffered a mortifying manufacturing glitch at its flu vaccine plant in England, leaving the U.S. with only half the inventory it needed for the winter. All these stumbles left biotech investors fearful about a tougher regulatory environment for drugs and manufacturing processes in 2005.

Are the worries legitimate? The Food & Drug Administration may well impose harsher safety requirements, but that doesn't mean people are going to spend any less on biotech drugs and vaccines. Ernst & Young International predicts that revenues for publicly traded biotechs will rise to $51.4 billion in 2005, up 19.5% from the total it forecast for 2004. One potential hit: the recently approved multiple sclerosis treatment called Tysabri, jointly marketed by Biogen Idec Inc. (BIIB ) and Elan Corp. New insomnia and cancer treatments are also on the near horizon.

On the research front, more private money is now flowing into promising work in embryonic stem cells. The field got a huge boost in November when California voters approved a 10-year, $3 billion stem-cell initiative, and other states may follow later this year.

As biotechs unveil breakthroughs in stem cells and other areas, they should attract more funding from pharmaceutical companies whose research pipelines are dry. Through early December, 2004, drug companies inked 451 licensing and investment deals with biotechs, compared with 314 in 2003, according to the Biotechnology Industry Organization (BIO), and the trend seems to be upward.

Such activity helps stoke investor interest. In 2004 companies raised $19 billion in public and private offerings, up from $14.9 billion in 2003, according to BIO, and 2005 could show similar results. VentureOne, a venture-capital research group, says the ability of VCs to "exit" their biotech investments via initial public offerings has been good over 2004, and that's a decent predictor for the coming year. But not just any startup will do, says Buck Phillips, managing director of Vector Fund Management LP: "Investors have shifted away from high-risk names and are looking for more mature companies." Jim Tullis, CEO of VC firm Tullis-Dickerson & Co., figures the Amex Biotech Index (BLK ) could rise more than 10% in the coming year.

Certainly the industry faces challenges. Patients and doctors are increasingly critical of new biotech cancer treatments that can cost as much as $10,000 a month. "The public is saying we don't want to pay a lot of money for drugs that won't importantly improve our health," says Burt A. Adelman, executive vice-president for development at Biogen Idec. Nevertheless, barring any drastic steps by the FDA, it's reasonable to expect new drugs, more funding, and fair returns in 2005.

By Amy Tsao in New York

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